In Racing Investment Fund 2000 v. Clay Ward Agency, Inc., 320 S.W.3d 654 (Ky. 2010), an LLC creditor attempted to force the LLC to call for capital from the members in order to satisfy the creditor’s judgment claim for unpaid insurance premiums. The creditor’s attempt was based on a capital call provision in the LLC operating agreement that stated in pertinent part the following:
“The Investor Members . . . shall be obligated to contribute to the capital of the Company, on a prorata basis in accordance with their respective Percentage Interests, such amounts as may be reasonably deemed advisable by the Manager from time to time in order to pay operating, administrative, or other business expenses of the Company which have been incurred, or which the Manager reasonably anticipates will be incurred . . .”
The court thoroughly analyzed the specific capital call provision in great detail (deeming the same as “ambiguous”) in determining the members’ liability to the LLC’s judgment creditor, but ultimately refused to order a capital call based on its interpretation of the limited liability provision contained in the Kentucky’s LLC Act. The LLC Act was deemed to be categorical in its denial of personal liability for members, and the court emphasized limited liability as the integral component of an LLC. The court required unequivocal evidence of the members agreement to assume personal liability, and ultimately determined that the specific language contained in the operating agreement did not rise to that level.
The court ruled that a creditor could not force LLC members to contribute capital to the LLC to cover the creditor’s claim unless the operating agreement, through explicit terms and provisions therein, unequivocally evidences the parties’ intention that the members assume personal liability for the same.
The lesson to be learned from this case is that one court’s “ambiguous” may be another’s “unequivocal”, and thus there is great importance in the proper drafting of operating agreement provisions setting forth capital call terms and conditions. It might be recommended that capital call provisions in operating agreements: 1) contain an express and unequivocal refusal to assume personal liability on behalf of managers and members; 2) limit the discretion of the mangers in demanding capital calls; 3) carefully define the purposes for which partial calls may be made and the type of expenses that such capital may be utilized for; 4) carefully set forth adjustments to be made to a member’s interest in the case of default of a capital call; and 5) consider adding a “no third-party beneficiary” clause, to make clear that no creditor or other third party has any right to rely on or to enforce any of the provisions of the operating agreement, including any obligation of members to contribute capital.